Suzanne Osberg - Martin Marietta Materials, Inc. C. Howard Nye - Martin Marietta Materials, Inc. James A. J. Nickolas - Martin Marietta Materials, Inc..

Kathryn Ingram Thompson - Thompson Research Group LLC Trey H. Grooms - Stephens, Inc. Timna Beth Tanners - Bank of America/Merrill Lynch Jerry Revich - Goldman Sachs & Co. LLC Philip Ng - Jefferies LLC Garik S. Shmois - Longbow Research LLC Robert F. Norfleet - Alembic Global Advisors LLC Adam Robert Thalhimer - Thompson Davis & Co., Inc.

Craig Bibb - CJS Securities, Inc. Scott Schrier - Citigroup Global Markets, Inc. Rohit Seth - SunTrust Robinson Humphrey, Inc..

Good morning, ladies and gentlemen, and welcome to the Martin Marietta Third Quarter 2017 Earnings Conference Call. My name is Kevin, and I'll be your coordinator today. At this time, all participants have been placed in a listen-only mode. A question-and-answer session will follow the company's prepared remarks.

As a reminder, today's call is being recorded. I would now like to turn the call over to your host, Ms. Suzanne Osberg, Vice President-Investor Relations for Martin Marietta. Ms. Osberg, you may begin..

Good morning, and thank you for joining Martin Marietta's third quarter 2017 earnings call. With me today are Ward Nye, Chairman and Chief Executive Officer; and Jim Nickolas, Senior Vice President and Chief Financial Officer. Jim joined Martin Marietta in August from Caterpillar, where he most recently led the Corporate Development Group.

Prior to that, Jim served in separate stints as Group Chief Financial Officer of Caterpillar's Resources Industry segment, as well as its Global Mining Business unit. I want to welcome Jim to his first Martin Marietta earnings call.

To facilitate today's discussion, as we have done in the past, we have made available during this webcast and on our website supplemental financial information.

As detailed on slide 2, today's teleconference may include forward-looking statements, as defined by securities laws in connection with future events, future operating results or financial performance. Like other businesses, we are subject to risks and uncertainties, which could cause actual results to differ materially.

Except as legally required, we undertake no obligation to publicly update or revise any forward-looking statements, whether resulting from new information, future developments or otherwise.

We refer you to the legal disclaimers contained in our third quarter earnings release and other filings with the Securities and Exchange Commission, which are available on both our own and the SEC website.

In addition, any margin references in today's teleconference are based on total revenues, which is different from previous reports where margins were based on net sales and excluded freight and delivery revenues.

Any non-GAAP measures discussed today are explained and reconciled to the nearest GAAP measure in our supplemental financial information, which is also available on our website and in our SEC filings. I will now turn the call over to Ward..

price leadership, prudent cost discipline, safety and operational excellence. Notwithstanding weather, we achieved record quarterly earnings per share, excluding the $12 million impact of non-recurring repair costs for certain of the company's leased railcars. For clarity, that non-recurring railcar expense is $0.12 per fully diluted share.

Our results for the quarter were also highlighted by improvements in pricing and gross margins. Notably, pricing increased across all product lines and segments, and aggregates product line gross margin improved 180 basis points.

The Mid-America Group, which experienced less operational disruption from this season's hurricane activity than our other groups, expanded its third quarter gross margin 330 basis points.

However, this group, and specifically the Mid-Atlantic division, experienced heavy precipitation, as portions of both North Carolina and South Carolina dealt with the 2017 hurricane season, which is among history's top 10 most active. And their aggregates product line shipments declined 2%.

Also noteworthy, our employees achieved record safety performance through the first nine months of 2017 with consolidated total injury incident rate that's nearing world class. A majority of our divisions are already at that level.

These accomplishments, particularly in the face of volume headwinds, underscore the benefits of our foundational focus on safety and operational excellence and the importance of our leading position in many of the nation's most attractive markets.

Our Building Materials business, which as a reminder includes aggregates, cement, ready-mixed concrete and asphalt and paving operations, continues to benefit from strong underlying market fundamentals. Aggregates product line pricing improved 5%, led by the Southeast Group's nearly 10% increase.

The Mid-America and West Groups reported pricing growth of 6% and 1% respectively. Geographic and product mix reduced aggregates product line pricing for the Southwest division, which is a part of the West Group, by 120 basis points, as several large energy projects requiring higher price materials were completed in 2016.

Cement pricing improved 4% during the quarter. Our ready-mixed concrete and asphalt average selling prices increased 5% and 12% respectively.

Shipment levels for the Building Materials business varied considerably across our geographic footprint, but overall, aggregate shipments declined 3%, cement shipments declined 10%, ready-mixed concrete shipments declined 13%, and asphalt shipments declined 11%.

Near record precipitation across a wide portion of our footprint, coupled with disruptions from hurricanes Harvey and Irma, resulted in estimated shipment volumes reductions of 2.1 million tons of aggregates, 40,000 tons of cement and 300,000 cubic yards of ready-mixed concrete.

The West Group's aggregate shipments were most negatively affected by weather, particularly in Texas, which experienced its fourth wettest third quarter in the last 123 years and decreased 7%. Daily aggregates product line shipments for our Houston district averaged 23,000 tons in August for days not impacted by precipitation.

Following Hurricane Harvey, these operations were shut down for five days. Shipment levels did not return to the August daily average until the ninth business day of September.

That reprieve lasted only two days before more substantial rainfall fell in the area, preventing shipments from reaching the daily 23,000-ton level again until the last business day of September.

Martin Marietta's impacts from Hurricane Irma were less harmful, and combined with the strong underlying market demand, allowed our Georgia and Florida facilities to resume operations at or above their respective three-year averages within a week of the hurricane.

Overall, the Southeast Group generated a 5% increase in third quarter aggregate shipments. The recent hurricane activity also affecting our quarterly cost and efficiency profile, particularly in the West Group.

Fortunately, we experienced limited physical damage, and repair costs were less than $1 million, indicative of the commendable efforts of our operating teams in executing our disaster preparedness plan.

Still, fuel supply constraints following the hurricanes caused a spike in diesel prices, resulting in an 11% increase in diesel fuel costs companywide when compared with the average price per gallon paid during the first six months of the year. Other hurricane-related impacts are equally real, though not as easy to quantify with specificity.

For example, production levels were lower than planned as we redirected teams to respond to the hurricanes, putting downward pressure on leverage and operating efficiencies. We also experienced logistic bottlenecks, as western railroads did not resume normal operations to our Houston distribution yards until mid-September.

Importantly, we view these disruptions and dislocations as temporary. As we have seen with previous weather disasters, such as 2012's 500-year flooding event in Colorado and Hurricane Matthew in 2016, natural disaster-related reconstruction efforts typically call for years of steady and needed building activity.

Tightened labor markets, in both the public and private sectors, continue to result in project delays and hinder significant growth in construction activity.

Many state departments of transportation are understaffed, thereby limiting the number of new projects stemming from the additional infrastructure funding provided by the Fixing America's Surface Transportation Act, or FAST Act, and other state and local initiatives.

Similarly, our customers are experiencing labor construction shortages, particularly in Texas, Colorado, the Carolinas, Georgia and Iowa, and many have pushed start dates for new projects into 2018.

We believe the lack of progress over key elements of federal policies, specifically healthcare, tax reform and infrastructure funding, continues to exert downward pressure on both public and private construction activity.

As we have seen historically, uncertainty around the federal government fosters inaction on the parts of states and contractors to advance construction projects or undertake significant capital investment.

Our Magnesia Specialties business reported third quarter total revenues of $64 million, a decrease of 2% compared with the prior year, reflecting inventory adjustment by several large chemical customers due to their unplanned downtime.

The timing of the business' kiln outages, coupled with higher energy and maintenance costs, led to a lower gross profit and earnings from operations. I want to reiterate our commentary in today's earnings release.

We are confident in Martin Marietta's long-term outlook, with fundamental drivers for broad-based construction activity supporting a steady and extended yet somewhat slower-than-anticipated cyclical recovery across our geographic footprint. We expect aggregate shipments to grow modestly until pro-growth initiatives emerge.

So, while the growth curve may be a bit less steep, the duration of the cycle will likely be extended. This underpins our confidence in the company's long-term outlook. The infrastructure market comprised 42% of third quarter aggregates product line volumes, somewhat below the company's most recent five-year average of 44%.

We've yet to see meaningful growth in related heavy construction activity, even though the building blocks to address the need for significant infrastructure investment exist.

As state departments of transportation and contractors address labor constraints and regulatory reform emerges, infrastructure activity should benefit more tangibly from the funding provided by the FAST Act.

Additionally, state and local initiatives that support infrastructure funding including gas tax increases and other valid initiatives passed over the preceding 24 months will continue to play an expanded role in public sector activity.

Non-residential volumes represented 32% of aggregates product line shipments in the third quarter, driven primarily by office, retail and warehouse projects, along interstate corridors particularly in the Mid-America and Southeast groups which reported strong industrial construction growth.

As a reminder, in the third quarter of 2016, we supplied aggregates, cement and ready-mixed concrete to several large energy sector projects in Texas that were not replaced in the back half of 2017 as was originally anticipated.

Looking ahead, additional energy-related economic activity including follow-on public and private construction will be mixed. But even here, with the price of oil somewhat rebounding, energy companies are again looking to grow rather than retrench.

While the pace of permitting and final investment decisions has been more cautious, we expect new energy-related projects should enter the bid phase in 2018 with construction activity in 2019 and beyond. Overall, non-residential construction is expected to modestly increase in both the heavy industrial and commercial sectors.

The residential market, which accounted for 19% of third quarter aggregates product line shipments, continues to expand providing the impetus for future non-residential and infrastructure activity. Multi-family building remained solid in several of our top metropolitan areas.

Additionally, in several key states, we're beginning to see greater levels of single-family housing activity which is more aggregates intensive.

Robust residential construction is expected to continue particularly in core Martin Marietta markets driven by high employment; historically, low levels of construction activity over the previous years; low mortgage rates; higher lot development; and higher multi-family rental rates.

Texas, Florida, North Carolina, Georgia, South Carolina and Colorado, six of Martin Marietta's key states rank in the top 10 for growth in single-family housing unit permits.

To conclude our discussion of end-use markets, ChemRock/Rail accounted for the remaining 7% of aggregates product line volumes and declined versus the prior-year quarter driven by lower balanced sales. Martin Marietta is dedicated to disciplined capital allocation to enhance shareholder value.

The company's capital allocation priorities remain unchanged and include the right value enhancing acquisitions that align the company's strategic growth plan, organic capital investment and the return of cash to shareholders through a meaningful and sustainable dividend and share repurchases.

The company's previously announced acquisition of Bluegrass Materials Company is expected to close in the first half of 2018. The company and Bluegrass Materials are continuing to work closely and cooperatively with the United States Department of Justice and its review of the transaction.

We deployed $309 million of capital in our business during the first nine months of 2017, including mobile fleet purchases that will reduce ongoing repair and maintenance costs. We increased our annual cash dividend by 5%.

And since the February 2015 announcement of our share repurchase program, we've returned nearly $1.2 billion to shareholders through both dividends and share repurchases. Currently, we have 14.7 million shares remaining in our repurchase authorization.

Finally, our ratio of consolidated net debt to consolidated EBITDA as defined in applicable credit agreement for the trailing 12 months ended September 2017 was 1.7 times in compliance with our leverage covenant.

In summary, extraordinary weather, construction-related labor shortages, project delays and government uncertainty have impeded expected shipment growth throughout the year and certainly in the third quarter. As a result, this morning's release reflected the revision of our full-year 2017 guidance as follows.

We expect the aggregates product line shipments to range from down 1% to up 1% with infrastructure shipments expected to decrease in the mid-single-digits. Non-residential volumes expected to remain relatively flat. Residential shipments expected to increase in the high single-digits.

And ChemRock/Rail shipments expected to decrease in the low double-digits. Aggregates product line pricing is expected to increase 4% to 5%. On a consolidated basis, we expect total revenues ranging from $3.87 billion to $3.97 billion, gross profit ranging from $910 million to $960 million and EBITDA ranging from $940 million to $985 million.

Despite compelling underlying fundamentals in 2017, expected shipment volume growth failed to materialize. Looking beyond 2017 and consistent with the macroeconomic picture we described, we expect growth in all three primary end-use markets over the next several years.

Our preliminary 2018 view sees higher growth most notably in the West and Southeast groups with comparatively slower growth in portions of the Mid-America Group, which historically has generated the company's highest margins.

For 2018, overall aggregate shipments are expected to increase in the mid-single-digits as the construction sector continues to face both labor constraints and governmental uncertainty that serve to inhibit a more enhanced rate of growth.

This preliminary outlook excludes any impact from the pending acquisition of Bluegrass Materials and any benefit from a potential increase in federal infrastructure spending.

To conclude, we're proud of our results and our employees' ability to manage through short-term disruptions while remaining focused on safety and the long-term growth of our business.

Our leading positions in many of the nation's most attractive and otherwise vibrant markets reinforce our confidence in Martin Marietta's ability to capitalize on the durable, multi-year construction recovery. Our customers maintain positive near and medium-term outlooks over the next several years, supported by their reported strong backlogs.

We're well positioned to benefit from the expected demand for infrastructure projects and private sector construction activity as regulatory reform emerges and departments of transportation and customers address labor constraints.

With a relentless focus on world-class safety standards, diligent cost discipline and operational excellence, we remain committed to achieving industry-leading results and further enhancing long-term shareholder value. If the operator will now provide the required instructions, we will turn our attention to addressing your questions..

Our first question comes from Kathryn Thompson with Thompson Research Group..

Hi. Thank you for taking my questions today. First question is really more on the quarter, and then I'm going to step back a little bit more strategically for following question. But the first two deal with more volume and pricing.

On the volume side, could you help us frame the relative underperformance of concrete and asphalt volumes in the quarter? And really trying to get a better understanding of how much of this is due to timing versus storms versus something more fundamental..

Kathryn, good morning. Thanks for your question, too. A couple of things on cement and concrete in particular. When we're talking about those two products, it's principally a Texas conversation. It's not wholly, because, clearly, we have a very attractive ready-mixed business in Colorado, but most of our cubic yards are in Texas. So, a couple of things.

Were both of those businesses impacted by Harvey? Absolutely. Did weather interfere? It did. Did energy? And what was going on and not going on with diesel fuel also interfere with those businesses? No question.

One thing, though, too, from a volume perspective that clearly affected the quarter – and, by the way, I'm going to be unapologetic about it, we are price leaders in that marketplace.

Particularly in cement, we feel like we have a very viable product in, what I believe, is going to be the most dynamic building materials market in the United States, specifically around Dallas, for probably the next 25 years.

And we have held the line on some pricing in that marketplace because we felt like that was simply the right thing to do for our business. If you go back and look at the Comptroller's report that obviously comes out every month, what you'll see is we did lose some market share in that marketplace because of it.

I think if you typically look at that, you'll see it's a 22%, 23% market share in Texas. I think the latest number has us down to about 18%. So, clearly taking some leadership positions there caused us some volume. Do I anticipate that we'll see some of that going come back? I do.

What I also tell you, we're going to be judicious in the way that we get it, absolutely we will.

So, what I would say, Kathryn, with respect to both cement for the reasons that I've just articulated and frankly for many of the same reasons relative to ready-mixed, we saw volume headwinds because of weather, we also saw volume headwinds because of our approach to pricing in that marketplace..

And, could you give a little bit more color around the asphalt shortfall too?.

Yeah. Absolutely, I can do that. I mean, asphalt, as you recall, is really a Denver-driven business for us. And we were hit with extremely wet weather in Colorado. We saw considerably less uptime for our crews in that particular marketplace than we did last year. There is absolutely nothing wrong with the market in Colorado at all.

I mean, to give you a sense of it, Colorado Springs experienced the wettest July since 1948 when records were first recorded in that marketplace.

So, if we look at the ready-mixed concrete business today – the hot-mix asphalt business today and what we think that will be for the rest of this year and frankly into next year, that has been and will continue to be a very attractive business.

The balance of the year in that business for us in Colorado will be driven purely and simply by whatever happens with weather for the rest of the year. But I mean, as we get to this point of the year, literally, we lost 56 production shifts versus 25 in the prior-year quarter and all that's driven by weather.

And you can effectively see that number nearly double quarter-over-quarter and not feel a modest headwind there, but there is nothing fundamentally at all that has changed from that very attractive business..

And quick clean up on the pricing question to, more related to the West Group.

To what extent did – and knowing that West Group pricing was up about 1%, to what extent were the optics of pricing impacted by storms?.

We had two things. Number one, when we're talking about the West Group in many respects, Kathryn, we're talking about two things, what's happening in Colorado and what's happening in Texas. Let me talk about Colorado first. Because we've indicated over time, you should see ASPs going up there at a rate higher than the corporate average.

And what we saw in Rocky Mountain was ASPs up 7%. So, what we anticipated happening in that marketplace is entirely what's happening in that marketplace. If we look at the South West division, the ASP was negatively impacted by about 120 basis points due to product mix and geographic mix.

So, we clearly saw a shift from clean stone and sand to lower priced base stone in that marketplace. So that clearly provided a headwind. The only marketplace that we really saw any degree of red around pricing was in that South Texas area for all the reasons that you would imagine..

Okay. Thank you. Final question on Bluegrass. Could you just give a little bit more color on the extension that anticipated close of this transaction? And any other color around that would be helpful. Thank you..

No. Sure, happy to do that. Where we sit right now is exactly where we thought we would from a process perspective and that we're working together with U.S. DOJ and that's a very normal process. We did receive a second request, which we fully anticipated. We did enter into a timing commitment with DOJ.

And the primary reason that you do that if you're us is, you want to give DOJ adequate time to review all the submitted information. What I'll tell you is, they have a lot of submitted information. We're very engaged with them as you would expect us to.

What it essentially does is it puts in the position that we're not going to certify substantial compliance with the second request until we get to a point in time that we have agreed with DOJ.

One of the issues that I'm sure they're concerned about is once we certify substantial compliance that puts some real deadlines on DOJ to come back and finish their work. What we'll tell you is, there's been nothing surprising in the second request whatsoever. We're focused only on a few areas.

As you would imagine, the vast majority of our teams internally are focusing on integration plans. We anticipate as we said in today's release closing this in the first half of 2018. So this continues to go along the line that we anticipated that it would when we closed the transaction. I hope that's helpful and responsive to your question, Kathryn..

Got it. Yes, it is. Thank you very much..

All right. Thank you..

Our next question comes from Trey Grooms of Stephens, Inc..

Hi. Good morning..

Good morning, Trey..

Ward, you mentioned in the press release and then again in your prepared remarks that as you kind of look out into 2018, seeing different geographies outperform others. And I think you pointed out more of the growth would come from the West and Southeast and probably slower in the Mid-America.

First, can you talk about what's driving that shift? Number one. And number two, how does that come into play with your outlook for profitability? I mean, you touched on the fact that Mid-America is a higher profitability market for you guys.

So just how do we think about that and how it plays in the incremental margins and so forth as we look into 2018?.

Sure. What I'll say, Trey, is, it's not so much a shift. It's a continuing trend that we've seen. So if we think about the last several years, clearly the western U.S. recovered more early or earlier than the eastern U.S. did.

What we're seeing and we clearly saw it in the third quarter, for example, is we saw nice growth in the southeastern United States, so principally Georgia, Florida, those types of markets. I think as we look at the Mid-America Group, keep in mind, that covers a very broad swathe of the United States for us.

So it's going as far west as places like Nebraska and it's coming clearly into the Mid-Atlantic. So what I would say are several things.

One, our business in the Midwest, so let's call it Iowa, Nebraska, Minnesota, has been a perfectly solid business, but it's been a solid business during a couple of years, for example, when the agricultural market has been really hit hard.

And what's very different about this time than it would have been, say, 15 years ago, if the ag economy had been down 15 years ago, we would not have seen the good steady business performance that we've seen over the last couple of years. So if we see that ag economy get some legs in the Midwest, I think that actually does a lot for that business.

If we pause and look at what's going on in the Mideast, for example, Indiana, Ohio, parts of West Virginia, we're almost running at capacity in places like Indianapolis. So we're waiting to see what else can be done in that market.

What's interesting to me is to see where the Carolinas are right now, because that's a marketplace that simply has not grown this year the way that we thought it would grow this year. And I think in many respects, it goes back to the type of dialog that I think we've all had over the last several months.

And that is we've simply not seen the growth on the public side that we anticipated that we would see.

I mean, Trey, if you and I were having this conversation a year ago, and I bet you that national highway construction activity would be down 4% nationally at this point of the year, my guess is not a lot of people would have taken that bet, because you would not have seen that.

What we see in portions of Mid-America is a need to see public come to the party. And if public comes to the party, it's going to be an impressive show. We certainly did not see that this year. Now bidding activity in parts of the East Coast has ramped up here toward the end of the year.

And that could certainly give a much better tailwind on that business going into next year. But frankly, a lot of people thought that's exactly what we would have seen this year. And remember what we've always said on incremental margins.

We think on average you would see 60% is volume returned, but we've also said the two areas that really need to be hitting for that to work are Southeast and the Carolinas. And the Southeast is looking pretty good. The West, we believe, is looking pretty good. We believe the building blocks are there for the Carolinas to do exceptionally well.

We thought that coming into this year as well. I think there's a lot that could tell us that there could be good momentum there next year. We thought we saw that coming into this year. So as we really frame our 2018 outlook, part of what we're being instructed by is what we've seen in 2017.

Is that helpful, Trey?.

Yeah, absolutely, Ward. Thank you. And kind of on that and some of the things that you talked about in the quarter. And labor constraints have been an issue for everybody and downstream in particular.

And I believe you noted that your outlook for mid-single-digit aggregates volume growth really assumes that this – and maybe some of the other more macro headwinds, you noted, don't see a tremendous change there going into next year.

Is that the right assumption there? And then, as you look into your individual markets, the customers you're talking to there, is there any potential to see any relief on the labor side, maybe as we get caught up in some of these storm markets, progressing into 2018? Or with volume improving, could we see continued or even further tightening on the labor side there in your opinion?.

What's interesting to me is, there are a lot of contractors who have not gone back and hired in a substantial way since the last downturn. But here's what's odd. Wage inflation hasn't gone wild and rampant through the construction sector.

So you're still seeing really relatively modest wage inflation, which tells me if contractors want to pick that pace up, particularly if work is coming out of DOTs more quickly, they can have in many respects the ability to do that from a financial perspective.

I think part of what we're seeing, and I tried to allude to it in our prepared remarks, is contractors are reasonably busy today. And if you think about many contractors across the United States, in fact most of them, they tend to be private closely-held companies. So you and I watch every quarter, but most of our contractor clients don't.

They're watching a year. And they're looking at their backlogs. And right now many of them have very attractive backlogs. They have full visibility into next year, some of them even beyond next year. And they're feeling very peaceful with that.

I think much of it's going to hang on, what can DOTs do? As you would imagine, we have a pretty healthy dialog with a series of DOTs across the United States, and even in places where we've seen gas taxes and other things go up, where clearly there will be more revenue.

One of the needs that I consistently hear from DOTs is, we need more people here to help us put this work out. So it comes back to the notion that we described coming into the year, the need is there. The money is going to be there. And what's odd to me, Trey, is we're still seeing infrastructure in our business below that five-year average.

And the day is going to come that we're going to see that pop above the five-year average. And it may be next year. But I do think those are some of the issues that are in the way. I think if we see some things come out of tax reform, and I haven't looked at it, but I do understand that the Republican proposal has hit the street today.

If there's some infrastructure funding that likely comes from tax reform, could that put DOTs and contractors in a different place? I think it probably could. And I think if you have contractors in a different place, you can clearly see more public work. That would be my quick take, maybe not so quick..

Thanks a lot for that as always. And then last one for me, just to make sure I heard everything correctly. You kind of touched on some of the impacts that, at least from you guys, measurement on what the storms, the impact that could have on aggregate, cement and ready-mixed..

Yeah..

Aggregates, that was 2.1 million tons. If I heard you right, that was the impact there; and then cement was 400,000; ready-mixed was 300,000 yards. And I missed the last one. I'm sorry..

I think we said asphalt and paving was probably 55.5 shifts versus 25 shifts in the prior year. So that was really – we were trying to do a product line on that. So that's the way we measure it, Trey..

Yeah. It's super helpful. And specifically, though, that's in the third quarter. That's not like an overall kind of impact even as we kind of maybe linger into 4Q a little bit or anything like that. That's specifically in the quarter..

That was definitely in the quarter. And look, there will be some lingering effect.

And you did say 40,000 tons of cement, didn't you, Trey?.

Correct. Yes..

Okay. I just want to make sure you had that. Okay..

That's it. Thank you very much for that, Ward. Thank you for taking my questions as well..

Thank you, Trey..

Our next question comes from Timna Tanners with Bank of America Merrill Lynch..

Hi, hey. Good morning, guys.

How is everyone?.

We are great, Timna. I hope you are..

Yes. Thanks. I know you offered 2018 volume color, and I didn't see anything on price and there may be a reason but I thought I'd ask anyway. If you could give us any thoughts on early pricing as your peer mentioned that momentum could be slowing a bit in some markets. Just want to get your take..

Well, look, I think if you look at the pricing performance that we put up today, I think the pricing performance that we reported is probably industry leading, right now. I haven't seen anybody else come out with the type of pricing that we have. Again, these are valuable products. They are diminishing resources. They are hard to replace.

And we're focused on value in these markets. Timna, what you've heard me say for years, and I think this metric continues to work, if you've got really subdued aggregates volume growth, say, less than 5%, then I think you can look back to more historic price increases in that 3% to 5%.

But I think, equally, if you have aggregate growth above 5%, suddenly the linkage between average selling price growth and aggregate growth gets to be much tighter, usually with a modest lag on the ASP percentage growth as compared to the tonnage growth.

Now, clearly, we have outperformed that this year, and we've outperformed that over the last several years. So, I'll leave that to your judgment on how to look at that going forward. But I continue to believe that as we look at these products, the pricing story is not something that I see being broadly shaken.

I think there has clearly been efforts in some markets because of depleted volumes this year when people have made some, what I would say, are fairly aggressive moves to pick up some volume. We've tried to be very disciplined in our market view..

Okay, great. So that's kind of a good segue to the second part of my question, which is, as you mentioned, there's that – on 5% volume growth, give or take, big impact potentially on the pricing side, and yet your guidance is for mid-single-digits, which is exactly 5% if we get picky about it.

So, can you just talk us through what are the main factors that we can watch that could help drive a 5%, 6%, 7% or 4%? Like within your guidance, what are the main things you're assuming, what could provide upside or downside in the major driving factors?.

I would look at a couple of things. One, if housing continues to stay good, I think that's going to give you some upside in large part, because housing contractors typically aren't buying big volumes. So, oftentimes, they're coming in buying it at near list price inquiries, so housing clearly helps.

The other thing that would help is, if you simply saw more infrastructure activity, because if you see more infrastructure activity, you're going to be selling more DOT specification stone, the more DOT specification stone that you're selling, it should simply have a higher ASP associated with it, particularly if there's more concrete and ready-mixed work because you're selling a higher spec stone, more volume and it simply ends up being in many respects a higher priced product.

Now, the other fact that you have to take into account, Timna, is, where are you in the construction cycle, because that's not necessarily true if it's brand new construction and you're selling more base product.

But I do think if we're looking at where we sit in this cycle, would still public not performing the way that people have expected it to, but still a great expectation for more to come. I think the more we see on public side, the better that is likely to be for average selling pricing, if you try to get a proxy for it going forward..

Let me ask it different way, because I understand that that makes sense but included in your mid-single-digit volume guidance, how much do you have, A, for repairs from storms, hurricanes embedded in that? How much do you have in any debottlenecking of kind of the public construction issues that you talked about?.

You know what, we built in modest pieces of that over the next several years, Timna. And that may end up being conservative, here's one reason that I say that but it's hard to tell. And that is, we've never seen a city the size of Houston go through the type of rebuild that Houston is going to experience.

If we go back over time and we look at what came behind Katrina or if we look at what came behind the storms in Denver five years ago, we're seeing the last of FEMA work from that storm in Denver five years ago, just being big and dealt with this year. My guess is, you may see a faster pace, but that's all it is, Timna, and we have not baked it.

And you may see a faster pace of that in portions of Texas going forward. If that does happen, it could be helpful because keep in mind, we're dealing with the long haul market in Houston. So, you do have a fully ASP-laden transportation-loaded product that's going into that marketplace from our perspective. That's typically going in by rail.

So, could you see more price that could come from that? You could. We have candidly not baked a lot of that in..

Okay. Great. Thank you very much..

Thank you, Timna..

Our next question comes from Jerry Revich with Goldman Sachs..

Hi. Good morning, everyone..

Hi, Jerry..

And Jim, Suzanne, welcome. I'm wondering if you folks can just bridge for us the EBITDA guidance reduction. Midpoint to midpoint, it's about $128 million. It looks like about half to two-thirds is from lower volumes.

Can you just help us flush out the remaining third and just rough buckets of costs? I'm assuming they're storm related, but can you just flush it out for us?.

Yeah. Hi, Jerry, it's, Jim. So, a couple of things. I think the sort of storm impact is in isolated to Q3 there'll be some lingering effects in Q4. So, it's hard to put a fine line under those but that's definitely get part of what we think is going to happen in Q4 and in fact, with our full-year guidance.

In addition to that, we've got the some of the one-time expenses that you need to recognize. We put into the third quarter, but those affected the full-year guidance, the $12 million for railcar expenses as an example. Those should take up most of it. And also, we've got a – frankly, an implied early start to winter in Q4 occurring.

And so, that's what we're baked in at this point for full-year guidance.

Does that get you what you need?.

That's helpful, Jim.

And then maybe just explicitly, I know it's tough to isolate the specific stranded costs and logistics and efficiencies, but how much of that is within the guidance?.

That's baked in the guidance. The way I think about that though is, if you think about what's the size of it in this year was – well, third quarter, our operations in Texas, Ward alluded to some of the reasons why the volumes were down there and the operating leverage, we lost as a result of that.

I think the way to measure that would be look at Q3 of 2016, look at the gross profits in cement and ready-mixed in Q3 of 2016, compare that to the gross profit margins Q3 of 2017 and maybe not to that degree, but a lesser degree that some of that occurring in the Q4 as well. Okay? And then hopefully those effects are worked through by 2018.

Those are not going to persist beyond Q4, but there's some of that in Q4 still, the loss operating leverage, again to a lesser degree that we saw in Q3 but some of that in Q4..

Okay. All right. Thank you..

Thank you, Jerry..

Our next question comes from Phil Ng with Jefferies..

In your 2018 guidance for volume, what are you expecting for public spending? And does that assume any of the logistical issues at the DOT front improve? And have you started seeing any of that fast money start kicking in some of these projects?.

What we have started to see, what we believe is some evidence of that picking up here toward the end of this year. What I'll tell you very candidly, Phil, is, we're anticipating for better or for worse, and it's probably candidly somewhat conservative on our view that we're not going to see remarkable relief on that next year.

And in large part, we're saying because we thought we were going to see it this year. And so, to the extent that you really see that breaking through in some meaningful ways next year, I think that would obviously be quite helpful to us.

Is that responsive?.

So just to be clear, in your guidance for 2018 for volumes, you're expecting limited growth on public spending or just the bottleneck not getting much better (44:29)?.

We're expecting the bottlenecking to begin to break loose, and we're expecting clearly to see it get better next year. I guess what I would like to see is for it to break through in a more meaningful way than we're anticipating right now because we think that should have happened this year.

So, we're clearly looking for growth in all three of our primary end uses next year. I'm still frustrated by the fact that infrastructure's 42% of what we're doing right now. It should be considerably higher than that. I would have thought it would have been higher than that coming into this year.

There's no reason structurally, as we look at it, that it shouldn't be higher than that next year. But again, we would have thought that coming into this year. As I indicated in one of the earlier questions, we will see that breakthrough. The question will be exactly when, and, I think we're taking a very measured, appropriate view of that right now..

Okay. That's a helpful color. And then your downstream business margins took a step back this year, some of that is related to these energy projects not being immediately replaced.

So, if some of these bids are not going out until next year, should we see any lift in 2018? Or is that more of a 2019 event?.

No, I think you will see lift going into next year. We clearly expect a better ready-mixed year, next year, in Texas, in particular. Look, we've got the best looking work behind that business in Texas on ready-mixed that we've had at any point since we've owned that business.

So, we talked a little bit about the fact that some of the issues that we've run into this year have been relative to weather, and some of the issues that we ran into this year were relative to the way that we were maintaining price leadership in that market as well.

I don't see us giving that up per se, but I do see us doing better on the volume side and doing better in that business generally..

Okay. Very helpful. Thanks a lot..

Okay. Thank you, Phil..

Our next question comes from Garik Shmois with Longbow Research..

Hi. Thank you. You mentioned that you're seeing an increase in bidding on the infrastructure in some markets, mainly in the east. I was wondering if you could remind us what the usual lag is between when a project is bid and when you start to see volumes shift to those infrastructure projects..

It can vary pretty considerably, Garik. It can be anywhere from two to six months oftentimes on those types of projects. So, it's going to depend on the nature of the project and exactly what it is, whether it's brand new construction overlays or otherwise.

So, it's going to be measured, typically, I would say, within a – let's call it within a six-month timeframe..

Okay. And this is a more qualitative just around your visibility and infrastructure. And we appreciate your frustration with the lack of infrastructure demand in 2016.

But is there any way to maybe qualify or if you can quantify your visibility on infrastructure into 2018 versus where you sat a year ago from this seat? How has that changed, and maybe your level of confidence as some of these bottlenecking initiatives will end up materialized?.

Yeah. Well, look, I guess several things. One is, we just look at DOTs across United States. I mean, clearly, for example, Texas DOT had a serious need to hire more people. They had a hiring freeze that they had in place for a fairly extended period of time this year. And here's what we see going into next year. Think of it in these terms.

So, as we came in to the year, they had an expected letting schedule of $7.3 billion, and it ended up being about $6.2 billion. So, it was less than even they thought. As we look ahead, they're looking at $7.5 billion for next year.

It's even increased $500 million since July, and the majority of that increase actually went to Fort Worth, and that includes $105 million of Prop 1 money. Here's what I think is notable, though, Garik. That doesn't include any Prop 7 money. So, if we're looking at Prop 7, what we're anticipating right now is $3.2 billion of that forecasted for 2019.

And what's, I think, important is TxDOT itself was saying they're looking at about $2.3 billion worth of September 2018 dollars, in otherwise that'll be let in advance of the Prop 7 funding. So, if we're looking at simply where they are relative to jobs, they currently have nearly 200 job openings, and that's per the TxDOT website.

The majority of the jobs posting are for engineers, transportation techs, design techs, et cetera. And here's what's fascinating. They had a job fair in Austin, and in the first 30 minutes, 50 people applied for the jobs. So what we're seeing in a state like Texas, which matters to us, you got a lot of people coming to work for TxDOT.

You've got a lot more money coming to work there as well, so we feel good about that. In Colorado, which is an important state for us, several things. We see big, good, large projects that are set to commence there in 2018. The I-70 reconstruction around Denver Metro is going to be a big job.

The I-25 widening in northern Colorado will equally be a big job. But notably, and this goes back to your commentary of what do we see going forward, new Senate Bill 17-267 allows Colorado to issue certificates of participation for about $1.8 billion in transportation projects over the next four years.

So again if we're looking at those two states that in large part comprise our West Group, and that gives you a good sense of what the public side of it can look like. I mentioned earlier that North Carolina, we're seeing the pace of letting in this state improve. Here's part of what's notable though over the next several years, is South Carolina.

And this is a stat that frankly I was unaware of until we were really looking hard. They manage the fourth highest number of highway miles in the United States in South Carolina. Now keep in mind, they've upped their gas tax, all of which is dedicated for transportation to increase $0.02 per annum for the next six years or $0.12.

So in large part, you're going to see funding increase to annual DOT in South Carolina over the next several years by $800 million. These are big numbers. And that doesn't take into account what we've already discussed previously on House Bill 170 in Georgia and what that's doing in doubling their DOT investment.

And Florida sitting at an over $10 billion letting schedule, which is near a record level. So as we look at what should be coming in those states, it should be pretty compelling..

That color is very helpful. Lastly, you clearly chose value over volume on cement. Just wondering how to think about cement pricing into 2018 if you've announced increase in rate pool yet (51:25)..

What we have spoken previously about the prospect of a $12 a ton increase in that marketplace, we have seen others come out and announced a $6 in Texas. We've seen another $6 increase announced in Arkansas and Louisiana and an $8 in Oklahoma. So the fact is, we're going to have to meet that and that is what we will do.

You've looked over time and you've seen the type of position that we have in that marketplace. And that's a position that we're going to protect in that marketplace. And we think we can do that in many respects and protect our price.

And we think we can do that with premium service in a marketplace that is going to be incredibly vibrant over the next several years, particularly in North Texas..

Thank you..

Our next question comes from Rob Norfleet with Alembic Global Advisors..

Hi. Good morning. Just quickly, Ward..

Hi, Rob..

You had mentioned obviously with the Mid-America segment being maybe a little less contributor in 2018. And then the fact obviously, we have some of these lingering issues with the hurricanes in terms of labor absorption as well as logistical challenges.

I know you're not giving guidance yet for 2018, but would that imply that margins on the aggregate side could be – I won't say the word challenged, but it could be lower than what we've seen them historically..

Yeah. I think it goes back to the conversation I was having with Trey a little while ago. I think the areas that are most impactful to the incrementals are what happens in the Southeast Group, and we anticipate that being better, and then really what happens in the Carolinas. And that is where we're waiting to see what happens relative to public work.

What we have are good population trends in North and South Carolina. What we have are relatively good DOT programs in both North and South Carolina. And what we're waiting to see is, when we really start getting a kick from the public side in those two states in particular, because if we see that, it's going to be a very attractive show.

But we would have expected a more attractive show from those this year. I mean, North Carolina's unemployment rate is 4.5%. So one of the challenges I'm sure DOT has here is finding qualified people to come to work for them. And if we look at DOT staffing in North Carolina over the last decade-ish, it's gone down by over 20%.

So I think that has been a challenge for them. At the same time, the need is significant. And I can tell you they want to get that work out. But again back to your question, it's going to be disproportionally driven by Southeast, where we see very good growth, and then how much you anticipate growth being in that Mid-Atlantic portion of Mid-America..

Okay. That's helpful. And then just secondly, one of your competitors noted that one of the issues impacting their margins was the fact that if you look at the type of product that they're shipping right now, it is of a lower margin quality product.

Are you seeing some of that in some of the markets you're serving?.

You know what? I think it can move around pretty considerably. So if there's early repair type work, yeah, I think that could certainly be it. If you're seeing brand new construction happen, you're selling base product that can have at least a lower ASP, not necessarily a lower margin.

Clearly, the more we see good high quality, high spec public work come in, that will help the margin on the material going out. So to the extent that we've seen public across the United States come back more slowly this year than anticipated, I do think that's a very fair observation. Yes..

Okay. And last question and I'll let you go. Obviously, there's been a lot of discussion post the storms, and the size of the effort of the rebuilding that would have to take place, especially in areas like Houston, where obviously a number of homes were just demolished.

I know we talked about obviously the problems that the storms created with logistics and things of that nature.

But is there on the flip side an opportunity as that rebuilding starts occurring?.

You know what? I think the answer is yes. And here are some of the things that we're going to have to think about.

Number one, what will the timing of federal funds really look like in those markets? What will insurance claims look like? How long will DoT integrity studies take for roads and highways? One thing that's important to remember on public work in particular, public work doesn't go away from a storm. It simply gets pushed out.

So as we go through and look at what's likely to happen in a place like south Texas and Houston, as I indicated before, we've never had a storm of that duration go over and park on top of the fourth largest city in the United States before. And everything that we have to compare that to goes back to Katrina or Colorado or otherwise.

And what I would say is, really it's unfair to compare what's likely to happen in Houston to what happened in New Orleans. I don't think we're looking for an X as (56:43) the people from Houston.

I think from a human resource perspective and from a fiscal perspective, what Texas is going to be able to do and what Houston is going to be able to do is far different than anything we've seen in the past. But I think what we're doing right now is using our previous experience to help guide what we think the outlook is going to be.

And again, if anything, we're probably going to be accused of being a bit conservative on that and we'll take that..

Great. Thanks, Ward..

Okay..

Our next question comes from Adam Thalhimer with Thompson Davis..

Hey, good morning. Thanks..

Hi, Adam..

Ward, the last time that you had mid-single-digit volume growth or better was 2015 and the incremental margin in aggregates was 65%. And I guess, if I'm hearing you correctly, you're just telling us to be cautious and say, I know we're forecasting mid-single-digit volumes but don't go and plug in a mid-60% incremental margin because of mix..

I mean, I think we're just saying let's watch where the growth is going to be. And let's just measure that very carefully together as we go through it. As we've said, Adam, I think the southeast is going to look good. I think the West is going to look good. I think much of Mid-America can look good.

We'll just wait and see some public pull through there so that's the general message, I think you're hearing..

Okay. And then lastly just maybe a comment on your capital allocation priorities for 2018. Thanks..

You know what, the capital allocation priorities really haven't changed. And we've been startlingly consistent on how those look. Look, we like the right transactions and that's exactly what we believe Bluegrass is.

We're also going to invest in our business and make sure that we have a business that can really sustain itself and we're going to be focused on returning cash to shareholders. And if part of what we said is, we want to have a meaningful and sustainable dividend. And obviously, we took that dividend up earlier this year.

We'll come back and revisit that again next year. But part of what we're going to be focused on for the rest of this year and obviously into next year, we'll be getting Bluegrass Materials done and integrating that business into ours..

Thanks..

Our next question comes from Craig Bibb with CJS Securities..

Hi, guys. I made it under the wire here. Could you talk about cement just for a little bit? I wasn't sure how it plays out, so, you're holding price and someone else's and they're taking share.

Do you just wait for them to reach capacity or how does it play out?.

You know what, Craig, it's not always just a clear-cut game. You're watching very carefully what's going on in the market. You're watching individual customers and looking at their movement. You're looking at what you feel like others' inventories may be and otherwise. So it's not just a clear-cut, easy formula.

We've got very capable people on the ground there in Texas that watch that business. And our strategy has candidly been very intentional in that marketplace..

And so, I mean, but you're not going to come back on price? So I'm really just wondering, you're not giving me a scenario of how that turns around..

Well, it depends on how full others are, how much work is coming, how much we believe premium service matters in that marketplace. I don't see us going backward on price. I can see us being competitive on price. I don't see a backward march if that's what you're concerned about..

Okay. And then it's early in Houston, but part of the solution and there's going to be a lot of dollars for it. It's likely to be another reservoir which you could use a lot of your product.

Did you guys have competitive advantage in your ability to serve that market?.

Well, keep in mind, one thing we did several years ago is we opened Medina Rock & Rail. And Medina Rock & Rail has a capacity put 10 million tons of stone on the ground, west of San Antonio and it's sitting on UP mainline and it's the largest quarry on the UP's vast network in the western United States.

And we have the ability to move stone into a series of sales yards that surround Houston unlike anyone else. So, I'll just let those facts speak for themselves, but I think they add up, too. Yes..

Okay. And then with the Bluegrass acquisition, it seems like it's playing with the DOJ pretty much like you expected.

Were you expecting to make divestitures when you bought Bluegrass?.

Yeah. What we said when we bought it is we weren't going to say the divestitures weren't possible, but we didn't see it like that. They would be material divestitures in the transaction and we feel exactly the same way today..

Okay. And then in general, there's a lot of M&A activity within the industry right now, including competitive bids.

Does that tell you anything about where we are on the cycle or why do you think it's all heating up at this point?.

It was interesting. If we go back to February this year, we had the same question. And part of our observation at the time was we thought this would be a year in which you would probably see fairly significant M&A activity, and I think we were entirely right on that.

Look, I think a lot of it's going to depend on who the sellers are and what type of business they have, where they are, if they're a private business in their families where they may be relative to succession. Look, I'm not going to kid myself what's happening with the tax code today. And over the next several weeks, it may drive some of that as well.

Look, I think there could be fairly considerable M&A activity. I'm not necessarily predicting it's going to be next year. But I think as we look at this sector over the next three, four and five years, I think it could continue to be fairly robust relative to M&A activity. That wouldn't surprise me at all, Craig..

Okay. This isn't generational sellers making a bet on the end of the cycle..

What I think, each family, if it's families selling businesses have their own unique drivers. And I think that's probably a question better put to them. So, I think there's some people who are probably looking and saying, you know what, it's just time, and that's more how I see this than anything else..

Great. All right. Thanks a lot guys..

Okay. Thank you..

Our next question comes from Scott Schrier with Citi..

Hi. You gave a lot of color earlier on the pricing particularly in the West. Taking into account all of your comments on what looks like to be a lot of DOT funding that could be there in the Southeast part of the country in the coming years. I'm wondering if there's anything one in the quarter that you consider with pricing.

And then as far as going forward, specifically, if I look at the Mid-America, it looks like it's the first quarter with a fixed handle on pricing year-on-year in about a decade. Is there anything in there and is there anything that suggests that this trend shouldn't continue? And likewise, in the Southeast you've been at over 10%.

Now, you're close to 10%.

Is there anything specifically in this quarter and is there any reason to think a trend like that shouldn't continue going forward?.

The Southeast is clearly a very healthy market right now. And part of what you're seeing there is the degree of price it clearly comes from the transfers that go into Florida by rail. What I would say is, remember Mid-America covers a lot of territory.

What I would point out to you that it's actually probably helpful to some of your math, we actually did sell some more fill product to North Carolina this past quarter that basically is a remarkably low price product, it didn't displace any other aggregate use.

But actually if we had normalized it for that fill, that would have taken overall pricing for us for the quarter in ags up to 6%. So, again, I think it's a remarkably market-by-market driven undertaking. And you heard the conversation I had with Timna earlier in the call about the way that I think we can just look at aggregate pricing generally.

But again, I see those markets is good, long-term, steady growth markets and pricing has been attractive in those markets as well..

Great. Thanks for that..

Thank you..

Our next question comes from Rohit Seth, but there's no company name given..

Hey, there. Got a quick question for you. There's a big bulge in the Texas DOTs lettings in September and August and we saw cement shipments. You're pretty good in coming out of the USGS shipment numbers.

I was curious, we're also seeing like the highway cost report that Texas DOT puts out that pricing has been coming down in many different metrics, not just the aggregates, but earthmoving and things of that nature. And then square that up with you mentioned you're holding a line on cement pricing.

I'm just hoping you could help me figure out what's going on, the competitive dynamic there..

What I would say is Texas is going to be an attractive market for a long time and there's a great deal of work there. We haven't necessarily seen evidence of things coming down per se the way that you're discussing, Seth.

But as we look at what we think, what we know, the letting schedule be and what the work in that state looks like right now and where pricing is in that state relative to a corporate average, again, my commentary goes back to what we said earlier in the call.

I think Texas and I think North Texas in particular can be one of the most attractive heavy-side building material markets in the United States for the next 25 years. I see very few things including population trends, employment and otherwise that make me feel differently about that.

I mean, if we're looking just through Texas generally, that North Texas to San Antonio I-35 corridor, all the fundamentals remain in place. Texas is ranked number one in employment growth for the trailing 12 months. Dallas is the second best metro in the nation on housing.

Houston even with the move from considerably less multi-family to more single-family stood at 7; San Antonio is at 25; Austin is at 27. The unemployment rate is 4.5%, and it's still number one in single-family unit housing permits and that Prop 7 money hasn't hit yet.

So again as we look at what's coming in Texas for an extended period of time, it looks pretty attractive to us..

Okay. And then in Colorado Sterling Construction has mentioned something about the bidding activity being pretty robust over there.

Do you have any comments on that?.

No. I think Colorado is going to be attractive for a long time as well. It's got good employment growth, it's ranked 18th overall, it's clearly faster than the rest of the United States. Unemployment in Colorado is at 2.2%. We see two large TIFIA projects in that state. C-470 is under way; I-70 starts in 2018.

Those two together equal about $1.7 billion in total investments. That separate instinct from the Colorado Springs 2C sales tax that was passed in November of 2015. And keep in mind, we talked about the certificates of participation earlier, that's an additional $1.8 billion in transport projects over the next four years.

So, if we're looking at a state that has been at a good level that we anticipate staying at a good level for a period of time, Colorado is at the head of that list..

Got you. That's all I have. Thank you..

All right. Thank you..

And I'm not showing any further questions at this time. I'd like to turn the call back over to our host..

All right. Thank you again for joining our third quarter 2017 earnings call. We remain confident in our long-term outlook. Our team's disciplined execution of our strategic plan continues to provide a firm foundation to enhancing long-term shareholder value.

And we look forward to discussing our fourth quarter and full-year 2017 results with you in February. Thank you for your time and your continued support of Martin Marietta..

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day..